Sorenson Manufacturing Corporation was incorporated on January 3, 2013. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to audit the financial statements for the year ended December 31, 2014, and your work is substantially completed. A partial trial balance of the company’s accounts follows:

The following information relates to accounts that may yet require adjustment: 1. Patents for Sorenson’s manufacturing process were purchased January 2, 2014, at a cost of $ 68,000. An additional $ 17,000 was spent in December 2012 to improve machinery covered by the patents and charged to the Patents account. The patents had a remaining legal term of 17 years. 2. On January 3, 2011, Sorenson purchased two licensing agreements; at that time they were believed to have unlimited useful lives.
The balance in the Licensing Agreement No. 1 account included its purchase price of $ 48,000 and $ 2,000 in acquisition expenses.
Licensing Agreement No. 2 also was purchased on January 3, 2013, for $ 50,000, but it has been reduced by a credit of $ 1,000 for the advance collection of revenue from the agreement.
3. In December 2013, an explosion caused a permanent 60 percent reduction in the expected revenue- producing value of Licensing Agreement No. 1 and, in January 2014, a flood caused additional damage, which rendered the agreement worthless.
4. A study of Licensing Agreement No. 2 made by Sorenson in January 2014 revealed that its estimated remaining life expectancy was only 10 years as of January 1, 2014.
5. The balance in the Goodwill account includes $ 24,000 paid December 30, 2013, for an advertising program, which it is estimated will assist in increasing Sorenson’s sales over a period of four years following the disbursement.
6. The Leasehold Improvement account includes
(a) the $ 15,000 cost of improvements with a total estimated useful life of 12 years, which Sorenson, as tenant, made to leased premises in January 2013;
(b) Movable assembly- line equipment costing $ 8,500, which was installed in the leased premises in December 2014; and
(c) Real estate taxes of $ 2,500 paid by Sorenson, which, under the terms of the lease, should have been paid by the landlord. Sorenson paid its rent in full during 2014. A 10- year nonrenewable lease was signed January 3, 2013, for the leased building that Sorenson used in manufacturing operations.
7. The balance in the Organization Expenses account includes pre-operating costs incurred during the organizational period. Required: For each of the items 1– 7:
a. Prepare adjusting entries as necessary.
b. Identify the substantive audit procedures you would perform to test the transactions.

  • CreatedOctober 27, 2014
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